Keep your house insured even in bankruptcy

Dear Bankruptcy Adviser,
We need to file for bankruptcy because we have a couple of properties that went into foreclosure. We had a lakefront home that we were able to short sale in January. We also had two other houses that were rentals. All of the houses will be included in the bankruptcy. The tenants moved out and the houses are vacant. They have still not been sold. The trustee sales keep getting delayed. Power bills and water bills are still coming in. I finally turned the power off.

1. Do I have to pay those bills or are they part of the bankruptcy because the houses are listed in the bankruptcy?

2. Do I have to keep the insurance policies active? Or can I cancel them and let the mortgage company activate their own?
-- Julie

Dear Julie,
You are asking good questions that are very common for many people right now. Since they cover two distinct areas, I'll answer them separately:

1. Do I have to pay utility bills or are they part of the bankruptcy because the houses are listed in the bankruptcy? You were wise to shut off the power on the properties if you no longer have tenants in the properties. Utility bills that exist prior to filing your case will be eliminated in your bankruptcy. You must make sure to list those bills in the petition so the utility companies are notified. However, post-filing utility bills cannot be eliminated.

It is important you make the lender aware you have abandoned the house. This will allow the lender to secure the residence and avoid vandalism, disrepair, overgrown shrubs and uncut lawns. You could potentially be liable for post-filing issues if you did not properly manage the property. It is not uncommon for people to break into a property that has been abandoned and steal copper piping, windows or other fixtures.

However, before you shut off the power, you need to consider reasons for keeping up on utility payments. For example, one issue to consider is whether the pipes might freeze and burst, resulting in a large bill that you may be responsible to pay.

2. Do I have to keep the insurance policies active? Or can I cancel them and let the mortgage company activate their own? This is a very important issue, one that could haunt you for many years after your bankruptcy filing. You definitely should keep your property insurance current until the house is officially out of your name, that is, sold at auction or transferred back to the bank.

For example, your tenants have abandoned the property, and you let the property insurance lapse. Then, a group of kids who know the property is abandoned break in and use the property as a personal playground. An accident occurs and the parents are stuck with a large medical bill. Those parents are going to find someone, likely you, to recoup those medical expenses. And failing to have adequate insurance could be an issue that will stay with you for many years after your bankruptcy is over.

Sometimes, you will be paying your property insurance through the mortgage payment. Typically this ought to keep the insurance current until the house is sold in foreclosure, but you are responsible to make sure property insurance is current.

The key is to avoid exacerbating an already awful situation. You want to keep your future exposure to a minimum as you seek bankruptcy protection.

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